The dollar has not had a good start to 2013, falling more than 1.5 cents US. (file image)

By Malcolm Morrison, The Canadian Press
Published Tuesday, February 19, 2013 11:13AM CST
Last Updated Tuesday, February 19, 2013 3:33PM CST

TORONTO -- The Canadian dollar closed lower Tuesday, hitting a fresh, seven-month low during the day amid worries centred on fears of massive U.S. government spending cuts, the housing market and oil prices.

The Canadian dollar fell 0.56 of a cent to 98.83 cents US after going as low as 98.65 cents US.

The dollar has not had a good start to 2013, falling more than 1.5 cents US.

Analysts say there is more than one issue putting pressure on the Canadian currency.

For starters, there's the looming sequester in the U.S., Canada's biggest trading partner. That is a huge package of across the board spending cuts worth US$85 billion that are set to take effect at the end of the month unless lawmakers can agree on other cuts that would be more selective.

It would cut a big chunk out of American economic growth, a worrisome prospect for an economy struggling to put in growth of even two per cent and bad news for an export-driven economy like Canada's.

The housing sector has also been a focus for worry with the International Monetary Fund saying that it is overvalued by a good 10 per cent.

Oil prices have also been a concern because of the gap between Brent crude and Western Canadian Select, which is the crude produced by Western Canada's oilsands. Recently, that price gap widened as much as $65 a barrel as pipeline bottlenecks have prevented growing oilsands production from getting to the most lucrative markets. That gap is now down to about $45 amid expectations it will fall even more.

There is also suspense over the future of the Keystone XL pipeline, which would carry bitumen from the Alberta oilsands to U.S. refineries in the Gulf of Mexico.

U.S. President Barack Obama rejected the pipeline last year, but invited TransCanada (TSX:TRP) to file a new application with an altered route that would skirt an ecologically sensitive area in Nebraska.

TransCanada did that and is now awaiting word on approval from the U.S. State Department.

Camilla Sutton, chief currency strategist at Scotia Capital, says the near-term outlook for the Canadian dollar is soft but strong in the medium term.

"China's improved growth outlook, combined with a recovery in the U.S., should also flow into Canada, particularly with regards to lumber and other commodity exports," she said.

"We would suggest the worst is behind Canada in terms of the Brent-WCS oil spread, housing is undergoing a needed moderate cooling and market risk aversion appears to be abating."

Traders also took in a couple of pieces of weak economic data.

Statistics Canada said that wholesale sales fell 0.9 per cent in December to $49 billion, after rising 0.7 per cent in November.

The agency said that the decrease was largely a result of lower sales in the computer and communications equipment and supplies industry.

Statistics Canada also said that non-residents reduced their holdings of Canadian securities by $1.9 billion in December, led by large retirements of bonds and equities. This was the second consecutive month of a net outflow of funds in the form of securities.

Commodity prices were mixed as the March crude contract on the New York Mercantile Exchange rose 80 cents to US$96.66 a barrel.

Copper prices fell sharply after several local governments in China announced new measures to restrict financing to potential homebuyers. That triggered concerns about a fresh wave of tightening for the property sector.

March copper ticked nine cents lower to US$3.65 a pound. China is the biggest consumer of copper, considered an economic bellwether as it is used in so many industries, including electrical and plumbing in houses.